Get Ready for Impacts to Your Retirement Accounts

As we careen toward the filing deadline for the 2014 tax year, now is a perfect time to look ahead to see what new changes to retirement accounts – taking effect this year and impacting the return you file in 2016 – have been implemented by the IRS.

It is likely that one or more of the following will apply to you. It behooves you to understand how the changes might impact your return next year:

Limit for defined contribution plans (e.g. 401k)

The MyRA

Limit on IRA rollovers

AGI phase-out ranges

Defined Contribution Plans — For the 2013 and 2014 tax years, individuals were able to contribute up to $17,500 as an elective salary deferral to a defined contribution plan. Also, an individual could contribute an additional catch-up contribution of $5,500 starting in the year they turn 50 years of age. The limits for these type of plans, the 401(k) is the most well-known, have been raised. The maximum contributions to private sector 401(k) plans, the federal government’s Thrift Savings Plan (TSP) and other comparable programs have been raised to $18,000 for 2015. For people over 50 years old, the catch-up contribution threshold has been increased from $5,500 to $6,000.

Of course a key feature of defined contribution plans such as a 401(k) is that the contributions are deducted from the individual’s paycheck before taxation and therefore, taxes are deferred until withdrawn after age 59½.

MyRA — Early last year, President Obama introduced the MyRA – short for My Retirement Account. The program’s goal is to encourage Americans to build savings that can supplement Social Security benefits. Individuals are allowed to open a MyRA with as little as $25, and to contribute as little as $5 in regular payroll deductions. Contribution limits are the same as for IRAs – currently $5,500, plus an additional $1,000 for those 50 years of age and older.

What are the key outlines of the plan in addition to the $25 required to open an account and the $5 minimum requirement for payroll deductions? The MyRA is available only to those who don’t have a retirement plan through their employer, there are no matching contributions, it is only available to those whose household income is less than $191,000 each year and once the account balance hits $15,000 or after 30 years (or earlier if desired), it must be rolled into a private Roth IRA.

2015 will be the first full year the MyRA has been in existence and many may not be aware of how it is treated with respect to taxes. Essentially, the MyRA is a type of Roth IRA. Like Roth IRAs, contributions will be made on an after-tax basis, meaning account holders will not get to adjust – lower their tax liability – for the tax year the contributions are made. However, the MyRA account will grow tax-free. For more information on MyRA, visit the Treasury Department MyRA page.

Rollover IRA — A type of traditional individual retirement account into which employees can transfer assets from another retirement plan. Why use a Rollover IRA? When an individual rolls over a retirement plan distribution, they generally don’t pay tax on it until it is withdrawn from the new plan.

By rolling over, the money continues to grow tax-deferred. If the payment is not rolled over, it will be taxable – excluding other than qualified Roth distributions and any amounts already taxed – and could also be subject to additional tax unless it is eligible for one of the exceptions to the 10% additional tax on early distributions.

Beginning in 2015, individuals can only execute one IRA rollover per year. A rollover involves taking money out of one IRA, holding it for fewer than 60 days, and then depositing it into another IRA. Note however, this new rule does not apply to the following:

AGI Phase-Out Ranges — The IRS defines AGI, or Adjusted Gross Income, as gross income minus adjustments to income. With respect to IRAs, the IRS limits the ability to contribute to these retirement plans based on income. Most individuals can contribute the same amount to a Roth IRA as they would otherwise be allowed to contribute to a traditional IRA. However, the amount that can be contributed to a Roth IRA is phased out at certain levels of income. In 2015, the AGI phase-out range for singles and heads of household taxpayers making contributions to a Roth IRA is $116,000 to $131,000, up from $114,000 to $129,000. For married couples filing jointly, the phase-out range has been adjusted to $183,000 to $193,000, up from $181,000 to $191,000 in 2014.

Turning to Traditional IRAs, the deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified AGIs between $61,000 and $71,000, up from the $60,000 to $70,000 range in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is now $98,000 to $118,000, up from $96,000 to $116,000 last year. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from the $181,000 to $191,000 range in 2014.